Business context and reporting period
This filing is Alliance Data Systems Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The supplied company metadata says Bread Financial Holdings, Inc., but the filing itself is for Alliance Data Systems Corporation (NYSE: ADS); Bread appears only as a proposed acquisition announced after quarter-end. The company reported two segments: LoyaltyOne, including AIR MILES and BrandLoyalty, and Card Services, which provides private-label and co-brand credit card services. Epsilon, sold in July 2019, is presented as discontinued operations in the prior-year comparison.
Key financial metrics
Amounts are in millions except per-share data and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,050.5 | $1,437.6 | $3,411.5 | $4,120.3 |
| Operating income | $291.0 | $304.2 | $629.6 | $998.4 |
| Income from continuing operations | $133.3 | $121.6 | $201.7 | $442.2 |
| Net income (loss) | $133.3 | $(107.6) | $201.7 | $180.5 |
| Diluted EPS | $2.79 | $(2.13) | $4.23 | $3.47 |
| Adjusted EBITDA, net (non-GAAP) | $249.5 | $367.3 | $489.2 | $993.5 |
- Revenue fell 27% in Q3 and 17% year to date. Operating margin was approximately 27.7% in Q3 versus 21.2% a year earlier, and 18.5% year to date versus 24.2%. The filing does not present these margins as reported metrics.
- For the nine months, operating cash flow was $1,488.6, investing cash flow $3,364.8, and financing cash flow $(5,064.3). Cash, cash equivalents and restricted cash totaled $3,750.9 at period-end; unrestricted cash and equivalents were $3,078.4.
- At September 30, total assets were $21,112.9 and stockholders’ equity $1,322.6. Net credit card and loan receivables were $13,517.8, after an allowance of $2,080.9, or 13.3% of period-end receivables.
- Debt included $2,834.3 of long-term and other debt before issuance costs, $10,163.0 of deposits, and $4,351.0 of non-recourse securitization borrowings. The company reported $750.0 of availability on its revolving credit line and compliance with financial covenants.
Material changes versus prior periods
- Card Services revenue declined 27% in Q3 and 16% year to date, primarily from lower receivables and finance-charge yield. Credit sales were down 21% in both comparisons; average receivables fell 12% in Q3 and 3% year to date.
- LoyaltyOne revenue fell 25% in Q3 and 24% year to date. COVID-related disruption reduced short-term loyalty programs and AIR MILES activity; the January 2020 sale of Precima also reduced reported revenue.
- Nine-month provision for loan losses increased 38% to $1,113.7, reflecting CECL adoption, COVID-related economic forecasts and credit losses. Q3 provision declined 30% year over year to $207.7, alongside lower receivables and net charge-offs.
- Year-to-date adjusted EBITDA, net declined 51% to $489.2. Card Services accounted for most of the decrease, with segment adjusted EBITDA, net down 55% to $407.2.
- Q3 net income compared with a prior-year net loss partly because the 2019 quarter included a $229.2 after-tax loss from discontinued operations related to Epsilon. Continuing-operations income increased 10% in Q3, but declined 54% year to date.
- The company adopted CECL on January 1, 2020, recording a $644.0 increase in the allowance through a cumulative retained-earnings adjustment, net of tax. It also issued $500.0 of 7.0% senior notes due 2026 and prepaid $493.8 of term loans.
Outlook, risks and unusual items
- Management reported sequential Q3 improvement: Card Services credit sales rose 28% from Q2, AIR MILES miles issued rose 18%, and miles redeemed rose 13%. It said credit metrics remained resilient and cited ongoing expense reductions.
- Management expects COVID-19 to adversely affect future revenue growth and overall profitability, but said the impact on financial condition, results and cash flows could not then be reasonably estimated. It warned that renewed restrictions could disrupt retail spending, travel-related rewards and operations. No specific financial guidance was provided in the supplied filing text.
- COVID-related cardholder assistance included payment deferrals and late-fee waivers; balances in those programs were approximately $202.9 at September 30. Separate short-term concession programs totaled $71.2. Troubled debt restructurings in two temporary hardship programs totaled $36.6.
- Other significant risks include higher credit losses and allowance requirements, reduced access to deposits or securitization markets, retail-partner weakness, regulatory changes, cyber and operational disruptions, and foreign-currency movements. The company’s banks were reported as well capitalized.
- Year-to-date asset impairment charges were $34.2, including deferred contract costs and right-of-use assets. A $31.1 deferred-contract-cost impairment was attributed to deteriorating conditions and lower credit sales.
- The company retained an indemnity obligation related to the DOJ investigation of Epsilon practices. A $32.9 after-tax loss contingency had been recorded in 2019; management reported no change in its estimate at September 30, 2020.
- After quarter-end, the company agreed to acquire Bread for an estimated $450.0, subject to customary conditions and regulatory approval, and announced a transition of credit-card processing hosting to Fiserv. The filing also reports a quarterly dividend reduction from $0.63 to $0.21 per share starting in Q2 2020 and suspension/expiration of the share repurchase program.
Important facts for investors to verify
- Confirm the issuer: this is an Alliance Data Systems Corporation filing, not a filing by Bread Financial Holdings, Inc.
- Review credit quality and allowance assumptions under CECL, including the 13.3% allowance ratio, charge-offs, forbearance balances and the effect of future economic forecasts.
- Assess funding and refinancing exposure: deposits, securitization maturities and conduit availability, alongside the 7.0% notes and amended credit-agreement covenants.
- Evaluate whether Q3’s sequential operating recovery can persist, given year-over-year revenue and adjusted EBITDA declines and management’s warning about ongoing COVID-19 effects.
- Check the proposed Bread acquisition’s final consideration, financing, regulatory approvals and integration risks, as well as the status of the Epsilon-related indemnity contingency.